The major listed retail landlords may ultimately benefit from Myer’s strategy to reduce space or close more of its department stores as it seeks to turn around its troubled business.In a classic every-cloud-has-a-silver-lining scenario, JP Morgan analysts have worked through the potential impact of the mooted store closures on major malls owners, and it’s not all bad.
Scentre, the operator of Westfield malls in this country, Vicinity Centres, fund manager GPT, and diversified player Stockland own or co-own 60 per cent of Myer’s floor space.
“In summary, we see the risks as minimal and see accretive opportunities for the landlords to get back space in larger stores, in particular for Scentre,” the JPMorgan team, led by Richard Jones, wrote in a recent client note.
Under the so-called New Myer strategy, chief executive Richard Umbers plans to reduce space or close 19 of its 59 stores, as the retailer seeks to reduce space by 20 per cent by 2020.
Since the strategy was adopted two years ago, Myer has cut is floor space by around 11 per cent, on JPMorgan estimates, and there is more to come, as it reiterated at its strategy day this month..
In many cases, there are long leases in place, so handbacks or closures will require negotiation with landlords.
“For the landlords, it can be a double-edged sword,” the analysts wrote.
Getting space back in a good quality centre can be a positive. Myer’s replacements will typically be a combination of mini-majors and specialty stores, which pay between two and seven times the rent the department store giant does.
The landlord will get higher rent but will need to invest capital to re-tenant the space. As well, there will be floor area lost in the remix along with the downtime between Myer closing and new tenants moving in.
“If the remix can lift traffic, then it should be accretive to value,” the analysts wrote, noting as recent examples the Scentre projects at Hurstville, where Myer closed, and in Miranda and Warringah, where the department store down-sized.
“Conversely, re-tenanting lower performing centres is not as simple.
“Tenant demand and tenant quality will be lower and the landlord may not increase rents or traffic, impacting the ability to lift surrounding specialty rents in the future.”
Myer will be exiting Scentre’s Belconnen and Hornsby malls in 2020, along with a smaller space at Vicinity’s Collonades in 2020.
In the JPMorgan view, there are opportunities for Myer to downsize at Westfield Parramatta and at Knox, where the department sores has large but lower-earning floor space.
Vicinity has a number of centres where Myer could look to scale back or exit – Roselands, Bankstown Central, Bayside shopping centre – depending on lease negotiations.
Needless to say, department stores’ relevance in the mall is not what it once was, the JPMorgan analysts noted.
“The average size of regional malls has effectively doubled in the past 20 years, but very little of the growth has come from increased department store space.”